Once Again: If Safety’s What You Want, You’ll Have to Accept a Lower Return

Q. We have about $400,000 that we would like to invest for two years. What would you recommend? Of course, we would like the highest return possible on a safe investment.

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A. You’ve read it here before, but once again: Return and risk are related. To get higher returns, you need to take more risk. If you want a safe investment--one in which you have little or no chance of losing your money--you must accept a lower return.

Because you’ll need the money in less than five years, most financial planners would steer you clear of riskier options such as the stock market or long-term bonds. That leaves you with money market accounts, certificates of deposit and short-term bond funds.

The average rate on a two-year certificate of deposit is about 5%. Money market accounts are closer to 4%. If you’re in a high tax bracket, you might also investigate rates on tax-exempt money market funds. If you shop around, you can find somewhat higher yields. You’ll find information about both types of investments at https://www.bank rate.com.

If you want to try for slightly more yield with slightly more risk, consider a short-term bond fund. Bonds can lose value when interest rates rise, but short-term bonds tend to react less to interest changes than their long-term cousins.

If someone is offering you a rate that’s much higher than the CD yields you see at the Bankrate.com site, you can be pretty sure you’re taking more risk. Beware of those who promise much higher yields for CDs or any other supposedly “safe” investment. Sometimes they’re selling “callable” CDs that have maturities as long as 20 years. Getting out earlier could cost you some of your principal. Other times they’re selling investments that carry even more risk. Buyer beware.

Death and Taxes

Q. You recently responded to someone who asked how to get a parent to reduce future estate taxes by making monetary gifts now. Your answer was terrible. Estate taxes are eliminated all the time in this country through living trusts. Any tax or estate attorney can do this easily. You never mentioned it. You spent too much time telling the person it wasn’t her money, which it actually would be if it were not going to taxes. Why should people pay the government money just because they die, if in fact they don’t have to?

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A. Why, indeed?

It could be because they don’t know the facts. They may not know, for example, that living trusts by themselves don’t reduce or eliminate estate taxes. They may be surprised to learn that living trusts are instead designed to avoid the court process known as probate, which is otherwise used to settle your estate after you die. Some people confuse probate costs with estate taxes, and they assume erroneously that living trusts take care of both. How silly of them, no?

Or maybe it’s because an estate tax burden can be reduced only so far. There are, indeed, ways to shrink an estate tax bill through other trust arrangements. If the estate isn’t too large, such trusts can even eliminate estate taxes. If you have enough money, however, eventually your estate is going to have to pay Uncle Sam, unless you want to give all your money to charity. (Think about it: Would there be such a hullabaloo about estate taxes if the wealthy could truly avoid them completely?)

As for your point about whose money it is, you’ve just identified yourself as a potential inheritor rather than a potential benefactor. If it really were your money, you’d understand how presumptuous it is for heirs to start getting possessive too soon.

Interest Deduction

Q. We have a $100,000 home equity loan on which we are paying about $900 in interest a month. We would like to use money we have in a mutual fund to pay off the loan, and then reinvest in the mutual fund using the money we save by not paying interest to the bank. However, we’re worried about losing the tax deduction we are getting because of the interest payments. What are your thoughts?

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A. It makes no sense to borrow money just to get a tax write-off. Here’s why: If you’re in the 28% tax bracket, every $100 in interest you pay saves you only $28 in taxes. Even at the top state and federal rates, you’re still getting a tax benefit of no more than about $50 for each $100 you spend.

Some experts say you shouldn’t rush to pay off tax-deductible debt because you can probably make more money over the long term by investing the money in the stock market. But if you’re not the gambling type and you want to pay off the debt--and your mutual fund isn’t held in a retirement account--by all means go ahead.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at http://161.35.110.226/moneytalk.